Transcript: Inside the $5 billion deal that Gov. Ron DeSantis' political appointees gave to Florida Power & Light
A transcript of episode 5 of Seeking Rents — The Podcast, which initially aired on Aug. 31, 2022
This is Seeking Rents, a newsletter and podcast devoted to producing original journalism — and lifting up the journalism of others — that examines the many ways that businesses influence public policy across Florida, written by Jason Garcia. Seeking Rents is free to all. But please consider a voluntary paid subscription, if you can afford it, to help support our work.
[00:00:00] Hello! And welcome to Seeking Rents — The Podcast. I'm your host, Jason Garcia, the publisher of Seeking Rents, a newsletter where we investigate the ways big businesses influence public policy in Florida.
The name Seeking Rents comes from a term in economics called rent-seeking. That's what it's called when billionaires and big corporations use their influence to twist laws in their favor in ways that make more money for themselves at the expense of everyone else.
This is episode five. And a quick word of warning: this is going to be our wonkiest show yet. But it also might be our most illuminating one.
If you get your electricity from one of Florida's big private power companies — and basically three out of four people in Florida do — you probably noticed that the price you're paying for electricity jumped at the start of this year.
Despite [00:01:00] what you might hear on cable news or from your uncle on Facebook, this is not because of inflation. Your electricity rates went up because a small group of people appointed by Florida Governor Ron DeSantis recently approved new rounds of rate increases for all of the state's big power companies. Those companies are Florida Power & Light, Duke Energy and Tampa Electric Company.
DeSantis' appointees — who lead an important but obscure agency called the Public Service Commission — let these power companies raise their rates by more than $1 billion this year alone. But they gave the biggest increase by far to Florida Power & Light.
You might have read about FPL lately. Newspapers around the state have been investigating a bunch of schemes that political consultants working for the company have been orchestrating, including using spoiler candidates to affect the outcome of key [00:02:00] state Senate races — all to ensure that the Florida Senate remains controlled by politicians who are friendly to companies like FPL.
Anyway, these people appointed by Governor Ron DeSantis allowed FPL to raise its rates by nearly $700 million this year. And by nearly $5 billion over the next four years. That's billion with a B.
This is the biggest rate increase that Florida has ever given to an electric company. It has fallen hardest on people living in Pensacola and other parts of Northwest Florida, one of the most Republican-heavy corners of the state.
But as big as these topline numbers are, they only tell part of the story of just how generous these Ron DeSantis appointees were to Florida Power & Light.
You know, I've talked before about how tax legislation is so arcane and complicated that it might as well be written in a foreign language. But if [00:03:00] you can learn to read that foreign language, you start to find some pretty shocking stuff — like tax breaks that lobbyists will call “economic development” but that are really just a way of secretly giving a bunch of your money to a company that makes big campaign contributions.
Florida Power & Light's new rate deal is written in its own kind of foreign language. But we're gonna learn to speak that language today, so we can see just how much Ron DeSantis' appointees gave to this politically influential company.
Like I said, we're gonna get into the weeds on this one. But I'll give you the top line takeaway right here at the start.
First, this new rate deal allows Florida Power & Light to make much bigger profits than the state's other big power companies.
And second, this new rate deal allows Florida Power & Light to keep hundreds of millions of dollars that it collected by overcharging its own customers.
Okay, let's explain how. But [00:04:00] first let's talk a bit about the business of electricity in Florida — who gets to sell it and how much they get to charge you.
The first thing to note is that electricity in Florida is mostly privatized. About three-quarters of customers in the state get their electricity from one of the big three private power companies.Again, they are Florida Power & Light, Duke Energy, and Tampa Electric Company. TECO for short.
FPL is the biggest of the three. It serves about 50% of all electricity customers in Florida, all by itself. It's basically twice as big as Duke and TECO combined.
These companies are monopolies. That means they have territories entirely to themselves where they get to operate without competition. If you live in FPL's service territory, you have to buy your power from FPL.
But the flip side of this is that FPL can't just charge you whatever it wants for that power. FPL's [00:05:00] prices — the rates that determine how much you pay on your monthly electric bill — are ultimately controlled by the state.
This happens through that agency I mentioned earlier called the Public Service Commission, which is run by five political appointees picked by the governor. People call it the PSC.
Now, there's a catch. Well, actually there are a lot of catches. But this is an especially important one: the PSC must let the power companies charge rates that are high enough that the power companies can earn a quote "reasonable" return on all the money they invest in upgrading and expanding their electric grid. When I say earn a return here, by the way, that basically means profit.
So in other words, you have to let these power companies earn a reasonable profit on all the stuff they build.
This means two things.
First, the price you pay for electricity depends quite a bit on how much profit the PSC lets your power company earn.[00:06:00]
And second, the PSC has quite a bit of discretion here. Reasonable is one of those squishy words that leaves a lot of room for interpretation.
Think about it this way: your power company's idea of a reasonable profit is probably a lot higher than your idea of a reasonable profit.
So there's a lot of wiggle room. And nobody has been able to take advantage of that more than Florida Power & Light.
Let's just quickly walk through a hypothetical example of how all this works. Now, this is a very oversimplified example. But we're just using it as an illustration so you can see some of the moving pieces at work.
Let's say FPL gets approval to build a new power plant. The power plant will cost $1 billion. And FPL expects this power plant will last for 20 years. This means that FPL will get to raise its rates for the next 20 years in two ways.
First, it will get to raise rates by $50 million a year to [00:07:00] recover that initial $1 billion investment. If you spread $1 billion across 20 years, you get $50 million.
And second, FPL will also get to raise rates by an additional amount in order to earn a return on that $1 billion investment. That additional amount is, essentially, FPL’s profit on the project.
So how do you decide how much profit FPL gets here? Well, there are a couple of key variables that go into it.
The first variable is called the equity ratio.
Let's go back to our hypothetical $1 billion power plant. The equity ratio is what determines how much of that $1 billion will come from FPL's investors versus how much will come from money that FPL borrows from lenders.
Money from investors is equity. Money from lenders is debt. There's a balancing act here. That's because debt is usually cheaper to use than equity — [00:08:00] partly by the way, because of all sorts of tax breaks for debt.
So that's the equity ratio.
The second variable is how much of a profit FPL gets to make on whatever amount of equity it invests. This is called the return on equity, or ROE for short.
So, very basically, a higher equity ratio allows FPL to invest more of its own money in a project. And a higher return on equity allows FPL to earn more profit on that investment.
Florida Power & Light's new rate deal is exceptionally generous on both fronts.
The Public Service Commission — which, again, is led by people appointed by Governor Ron DeSantis — lets FPL use an equity ratio of 59.6%. Almost 60%. That is a lot higher than Duke or TECO. Duke's equity ratio is just 53%. TECO's is [00:09:00] just 54%.
And the same thing is true with FPL's return on equity.
Now, the PSC sets ROE levels in a range. Again, very basically, the power company gets a minimum return on equity that it is pretty much guaranteed to earn every month. But it also gets a maximum return on equity every month. Its profits cannot exceed that cap.
Under its new deal, FPL's monthly return on equity was capped at 11.7%. Once again, that's a lot more than Duke or TECO. Duke's ROE was capped at 10.85%. TECO only got 11%.
These might seem like small differences. But they add up to hundreds of millions of dollars in extra profit because FPL spends so much money building stuff.
There's a group out there called Floridians Against Increased Rates. It has filed a case before [00:10:00] the Florida Supreme Court asking the court to reject FPL's new rate deal, in part because the group says this deal allows FPL to earn excessive profits, particularly when compared to Duke and TECO.
According to that group, if Florida Power & Light had to use the same equity ratio and the same return on equity as Duke does, FPL's rates would be lowered by nearly $500 million a year. That's more than the entire state of Florida spends on pre-kindergarten.
Now, you might be wondering what Florida Power & Light would have to say about this. Basically, the company's position is ‘We deserve it. We're better than the other power companies. Our rates are lower, our service is more reliable, and our emissions are cleaner.’
One of FPL's main talking points when it's questioned on this stuff is that, ‘Customers don't pay equity ratios. They don't pay ROEs. They pay bills. And our bills are lower than Duke's or TECO's.’ [00:11:00]
Except the point here is that those bills could be lower — particularly when you think about how much bigger FPL is and how much more scale it has.
FPL's counter argument is that a higher equity ratio and a higher return on equity — and therefore higher profits — create financial strength and stability for the company. And it also says that that strength and stability let the company optimize its operations in a way that ultimately keeps its overall costs low. And that in turn keeps its rates low.
The first part is clearly true. If a company makes more money, it will be financially stronger. The second part is a lot fuzzier though — that letting FPL make more money is somehow directly correlated with lower rates.
I mean, even FPL acknowledges that cutting its equity ratio or return on equity could reduce rates in the short term. But the company claims this would ultimately backfire in the long term and that its rates would [00:12:00] end up rising faster over time than they otherwise would.
I guess the question here is, do you believe them?
Okay, so FPL gets to invest more of its own money than other power companies. And FPL gets to earn a greater return on its investment than other power companies. So FPL can make much more profit than other power companies.
But we're still just scratching the surface of what Ron DeSantis' Public Service Commission gave to Florida Power & Light. And in this case only to Florida Power & Light.
FPL's new deal also includes an odd feature that neither Duke nor TECO have. It's got sort of an intimidating name: the Reserve Surplus Amortization Mechanism. The cool kids call it the RSAM.
I know this sounds impossibly dull. But it's important to understand what the RSAM is and how it works, because it is, in my opinion, pretty outrageous.[00:13:00]
Let's go back to our hypothetical $1 billion power plant. Remember: FPL expects this power plant will last for 20 years. So to recover that initial $1 billion investment, FPL will raise rates by $50 million a year for the next 20 years.
But let's say eight years after opening this power plant, FPL decides it will actually last for much longer — for 40 years instead of 20. That means FPL should have been charging its customers $25 million a year to recover its original money. That's $1 billion spread over 40 years.
It also means that FPL has been overcharging its customers for the past eight years, because it's actually been charging them $50 million a year for this power plant. So after eight years, FPL would've already collected $200 million more than it should have.
What should FPL do with this money? Well, [00:14:00] one simple solution would be to give it back to customers. And you could easily do that just by lowering your future rates. But the RSAM gives FPL a way to keep this $200 million for itself — the $200 million it got by overcharging its own customers.
Instead of giving the money back to customers directly, FPL gets to set this money aside in a reserve account. So what happens to the money?
We talked earlier about how FPL gets to earn a return on equity, or ROE, of up to 11.7% every month. Well, let's say FPL's profits for a month are going to come in a little below that cap.
That's where the RSAM comes into play. If FPL's monthly profit isn't quite as high as it could possibly be, FPL gets to take money out of this reserve account to use as a little bit of extra padding for its monthly profits.
But that's not all the RSAM [00:15:00] does. Because let's say FPL's profits for a month are going to come in above the cap. Normally, this would mean FPL is over-earning. And if the company over earns, it could be forced to lower its rates.
But the RSAM lets FPL sidestep this limit. If FPL makes too much money in a month, it can simply park the excess profits in this reserve account. And those extra profits will sit there until another month comes along in which FPL once again has room for a bit more profit-padding.
In other words, the Reserve Surplus Amortization Mechanism is just a complicated sounding way of letting FPL keep money that it makes by making customers pay too much money.
Now, FPL says this is actually a good thing for customers.
Here's why: we talked about this before, but FPL's new rate deal [00:16:00] covers the next four years. It ultimately allows FPL to raise rates by roughly $5 billion. But it is very front loaded. There are big rate increases this year and next. But not in years three or four.
FPL says being able to tap into money from this reserve account is what enables the company to commit to a four-year rate deal that doesn't have major rate increases in years three and four. Without the RSAM, the company says it would probably try to increase rates again much sooner.
Maybe that's true. Although it seems to me that it's a bit disingenuous to claim that you're not raising rates when you are also keeping money that you overcharged.
One other note about this, too. This setup can also lead to some other unintended consequences.
For instance, a couple of years ago, FPL was able to use this reserve account to pocket more than [00:17:00] $1 billion in tax savings for itself — instead of passing those savings onto its customers. We wrote a story about that last week on Seeking Rents. I'll post a link in the show notes.
Okay. Time to come up for air. That was...a lot.
In case it's helpful, we post transcripts of every podcast episode online. So you can read everything we've just discussed, too, in case that makes things a bit easier to digest. You can find it at SeekingRentsFL.com.
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Okay. That really is it. Thanks for listening everybody. See you soon.